Model Answer
0 min readIntroduction
In today's digitally-driven business landscape, the reliability of IT infrastructure is paramount, especially for companies like A Tech Solutions that specialize in automated systems. Unforeseen system failures can lead to significant operational disruptions and financial losses, impacting productivity and client satisfaction. This scenario presents a classic decision-making problem in operations management, where a company must evaluate the financial viability of investing in preventive measures to mitigate potential risks. The core challenge lies in quantifying the costs associated with both maintaining the status quo (dealing with breakdowns as they occur) and proactively preventing them through a service contract.
Decision Analysis for Preventive Maintenance Contract
To advise A Tech Solutions on whether to sign up for the preventive maintenance contract, a thorough cost analysis comparing the current scenario with the proposed contract scenario is essential. The objective is to minimize the total expected monthly cost related to system breakdowns.
1. Current Expected Monthly Loss due to Breakdowns
First, we need to calculate the average number of breakdowns per month over the past 20 months. We use the provided data to determine the total number of breakdowns and then divide by the total number of months.
| Number of Breakdowns (x) | Number of Months (f) | f * x (Total Breakdowns) |
|---|---|---|
| 0 | 4 | 0 |
| 1 | 8 | 8 |
| 2 | 6 | 12 |
| 3 | 2 | 6 |
| Total | 20 | 26 |
- Total number of breakdowns over 20 months: 26
- Total number of months: 20
- Average number of breakdowns per month (Current): Total Breakdowns / Total Months = 26 / 20 = 1.3 breakdowns per month
Given that each breakdown results in an average loss of ₹4500/-:
- Current expected monthly loss due to breakdowns: Average breakdowns per month * Loss per breakdown
- Current expected monthly loss = 1.3 * ₹4500 = ₹5850/-
2. Expected Monthly Cost with Preventive Maintenance Contract
If A Tech Solutions signs up for the contract, the following changes are expected:
- Average number of breakdowns is expected to decrease to: 1 per month
- Contract cost: ₹3300/- per month
Now, calculate the expected monthly loss due to breakdowns with the contract:
- Expected monthly loss due to breakdowns (with contract): New average breakdowns per month * Loss per breakdown
- Expected monthly loss = 1 * ₹4500 = ₹4500/-
The total expected monthly cost with the preventive maintenance contract will be the sum of the contract cost and the expected monthly loss due to the remaining breakdowns:
- Total expected monthly cost (with contract): Contract cost + Expected monthly loss due to breakdowns
- Total expected monthly cost = ₹3300 + ₹4500 = ₹7800/-
3. Comparison and Recommendation
Let's compare the costs of both scenarios:
- Current expected monthly cost: ₹5850/-
- Expected monthly cost with preventive maintenance contract: ₹7800/-
Based on this financial analysis, the current expected monthly loss (₹5850) is lower than the expected monthly cost with the preventive maintenance contract (₹7800).
Conclusion and Advice
Based solely on the provided financial information and the calculated expected monthly costs, A Tech Solutions should not go for the preventive maintenance contract. Signing the contract would increase their total expected monthly expenditure related to system operations from ₹5850 to ₹7800.
However, it is crucial to acknowledge that this analysis is purely quantitative. Other qualitative factors, though not explicitly provided for calculation, might influence the final decision. These could include:
- Reputational Damage: Frequent breakdowns, even if financially managed, can erode client trust and damage the company's reputation as an IT consulting firm.
- Employee Morale and Productivity: System failures can cause frustration among employees and lead to lost productivity beyond the direct financial cost calculated.
- Risk Aversion: Some companies prefer a fixed, predictable cost (like a contract) over variable, unpredictable losses, even if the expected value is higher.
- Severity of Breakdowns: The average loss per breakdown might not capture the full impact of severe, long-duration outages.
- Future Growth and Scalability: A more stable system might be crucial for future expansion and handling increased workload.
While the current financial model suggests not taking the contract, A Tech Solutions should consider these qualitative aspects before making a final decision. If the unquantified costs (e.g., reputation, morale) are deemed significant, the contract might still be a worthwhile investment despite the higher direct financial outlay shown in this analysis.
Conclusion
The quantitative analysis reveals that A Tech Solutions' current expected monthly loss due to system breakdowns is ₹5850, which is less than the ₹7800 monthly cost associated with adopting the preventive maintenance contract. Therefore, from a purely financial perspective, the company should not proceed with the contract. However, this advice is limited by its quantitative scope. Strategic decision-making in operations management often requires balancing financial metrics with qualitative factors such as reputation, client satisfaction, and employee morale, which could potentially justify a higher expenditure for enhanced system reliability and operational stability.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.